After previously criticising Iran for blocking the Strait of Hormuz, President Trump declared yesterday that the United States Navy would, "effective immediately", begin "BLOCKADING any and all Ships trying to enter, or leave, the Strait of Hormuz."1 Within hours, US Central Command had quietly narrowed the scope: enforcement would target only Iranian-bound traffic, not the total closure the president had announced, and would begin on Monday at 10 a.m. ET.2 Policy on the world's most important energy chokepoint was being drafted in public and corrected in real time.

The announcement followed the collapse of peace talks in Islamabad after more than twenty-one hours of face-to-face negotiations between Vice President JD Vance and Iranian officials, the first direct US–Iran dialogue in over a decade. The US demanded a complete end to uranium enrichment, the dismantling of Iran's enrichment facilities, and the full reopening of the strait without tolls. Iran demanded control of the strait, war reparations, the release of frozen assets, and an end to Israeli strikes on Lebanon. Neither side budged.3 According to the UAE's Minister of Industry, Dr Sultan Al Jaber, around 800 commercial vessels are stranded, including over 400 tankers.4 The International Energy Agency has called it the largest supply disruption in the history of the global oil market.5

The United States launched this war to prevent Iran from acquiring a nuclear weapon. Six weeks on, the country that underwrites the global financial system is itself blockading the world's most important energy chokepoint, and its closest allies are paying the price. The war has not emerged from a stable baseline. It has arrived after a year of threats to annex Greenland, the abduction of the Venezuelan president without allied consultation, and volatile tariff announcements that have given global equities whiplash. The world's enforcer and reserve currency issuer is behaving in ways that make dependence on it feel less like a privilege and more like a liability, and sentiment among even traditional allies has turned sharply: just eighteen per cent of Leave voters in the UK say Trump has handled the Iran war well.6

The Allies' Bill

The economic damage to countries that had no say in this war is already severe and, in some cases, will take years to repair.

Last month, the Bank of England's Monetary Policy Committee voted unanimously to hold rates, estimating that the Iran energy shock could push CPI inflation to as high as three and a half per cent by the third quarter of 2026.7 The rate cuts that were expected to ease mortgage costs and support an already sluggish economy have been shelved indefinitely. As Sir Keir Starmer put it, the British people should not be "paying for a war the country is not actively involved in."8

The picture across the Channel is no better. The European Central Bank postponed its own planned rate reductions, raising its 2026 inflation forecast and cutting GDP growth projections. Europe entered this crisis with gas storage at just 46 billion cubic metres, compared to 60 billion in 2025 and 77 billion in 2024, and must now compete with Asian buyers to refill before winter.9 Italy, where Qatar supplies roughly thirty per cent of annual gas needs, faces some of the sharpest consequences.

For Qatar, a close US ally that hosts the largest American military base in the Middle East, Iranian missile strikes on the Ras Laffan Industrial City destroyed two major LNG processing facilities, removing 12.8 million tonnes per year of export capacity and an estimated $20 billion in annual revenue. QatarEnergy has confirmed a three-to-five-year repair timeline.10

"This has taken the whole region back 10–20 years."

Saad al-Kaabi, QatarEnergy CEO, via Reuters.11

Saudi Arabia confirmed this week that strikes had cut its production capacity by 600,000 barrels per day and reduced the flow at its critical East–West pipeline, a lifeline for exports bypassing Hormuz, by a further 700,000 barrels per day.10

These losses have been inflicted on countries hosting US military bases. The Abraham Accords, decades of economic partnership, and the physical presence of American forces all failed to prevent Gulf energy infrastructure from being destroyed — not by some external adversary, but as a direct consequence of a war Washington chose to launch. A 2026 Arab Opinion Index survey conducted before the war found that 77 per cent of respondents believe US policies threaten regional stability, up from 21 per cent in 2022.12 The entire framework of US–Gulf relations since 1974 has rested on an informal bargain: American security guarantees in exchange for dollar-denominated oil and the recycling of petrodollar surpluses into US debt. The guarantee has now been tested, and it has failed.

The Bargain That Built The System

To understand the scale of what is now at risk, it helps to recall how the petrodollar arrangement came about. When President Nixon abandoned the gold standard in 1971, he removed the anchor that had sustained global demand for the dollar since Bretton Woods. The currency needed a new source of structural demand, and the 1973 Arab oil embargo provided both the crisis and the opportunity.

In 1974, Secretary of State Henry Kissinger and Prince Fahd bin Abdulaziz signed a joint commission agreement for economic and military cooperation. The formal document was unremarkable. What mattered was the understanding beneath it: Saudi Arabia would price its oil exclusively in dollars and channel its surplus revenues into US Treasuries, and the US would guarantee the Kingdom's security and supply it with arms.13 Within a year, dollar-denominated oil trading had become the norm across OPEC. The dollar no longer needed gold. It had oil.

The effect on global capital flows was profound. Any country that imported oil first had to acquire dollars, sustaining baseline demand for the currency worldwide. Gulf exporters, in turn, directed a substantial share of their revenues into US Treasuries, creating a class of large, reliable buyers for American government debt who cared more about safety and the relationship than about yield. The arrangement was never formalised as a treaty. Its durability came from something else: the belief among Gulf states that the American security guarantee was credible.

That belief has been tested before. The 2003 invasion of Iraq left a lasting impression across the Middle East. A RAND Corporation study found that the war eroded local confidence in US credibility and facilitated opportunities for Chinese and Russian involvement in the region.14 The Iraq war did not break the petrodollar system, but it planted doubts about the reliability of America's promises.

The Iran war has brought those doubts into the open. The country that once offered security in exchange for dollar-denominated oil trade is now the country whose military campaign has destroyed the energy infrastructure of its own Gulf partners. Gulf states are exploring defence partnerships with Pakistan, India, and Turkey, hedging against what they increasingly regard as an unreliable American guarantee.15 The financial conventions that accompanied the security relationship do not survive on their own. If the security half of the petrodollar bargain has been damaged, the question is how long the recycling half can continue as before.

What The Data Already Shows

These shifts in confidence are not merely diplomatic. They are visible in the changing composition of US Treasury holders and the rising cost of servicing American debt.

Foreign holdings of US Treasury securities have fallen from a peak of nearly fifty per cent of publicly held debt around the time of the global financial crisis to approximately thirty per cent today. China alone has halved its holdings, from $1.32 trillion in late 2013 to $683 billion by the end of 2025.16

Foreign-held share of US publicly held debt (%). Source: Treasury International Capital (TIC) data; CBO historical tables; Bipartisan Policy Center (October 2025).

The decline predates the Iran war by over a decade, driven by China's diversification into gold and non-dollar reserves, US debt growth outpacing foreign purchases, and successive credit-rating downgrades, most recently Moody's removal of the US prime rating in May 2025.17 The Federal Reserve noted in July 2025 that the current foreign share is broadly comparable to that of euro-area, Japanese, and British government debt, suggesting the era of unrivalled foreign appetite for Treasuries may already be over.18 The question is whether the war causes this trend to broaden, from adversaries and competitors to allies.

The fiscal stakes are enormous. Net interest on the federal debt reached $970 billion in FY2025 (surpassing national defence spending for the first time) and the CBO projects it will exceed $1 trillion in FY2026, making it the fastest-growing portion of the federal budget.19

US federal net interest expense by fiscal year. FY2026 annualised from Oct 2025–Mar 2026 data. Source: US Treasury Fiscal Data API.

None of this means the dollar is about to lose its role as the world's primary safe haven. In the short term, geopolitical crises tend to strengthen the dollar, and the Iran war has been no exception. The risk is structural, not immediate, and the GAO flagged precisely this in its March 2026 report: a gradual diminishment of the dollar's international role would weaken demand for Treasuries, and unsustainable federal debt could push investors to demand higher yields.20 The two trends shown above (declining foreign holdings and rising interest expense) are the early symptoms of exactly that trajectory.

Why does buyer composition matter? Foreign central banks and sovereign wealth funds have historically been price-insensitive buyers of Treasuries: they purchased US debt not for attractive returns but because they needed somewhere to park dollar reserves. As these buyers step back, the marginal purchaser at Treasury auctions becomes a hedge fund or asset manager that demands a higher yield. In 2025, the Treasury issued roughly $29.7 trillion in marketable securities across 444 auctions, the vast majority of which was existing debt rolling over at whatever rate the market demanded that week. Even modest shifts in who shows up to buy move yields.21

The Dollar Won't Be Replaced, But That Isn't The Point

It is tempting to frame all of this as the beginning of the end for the US dollar. It is not. The dollar's dominance in global finance runs far deeper than commodity pricing, and the data makes this clear.

The BIS 2025 Triennial Central Bank Survey found the dollar on one side of 89.2 per cent of all foreign-exchange transactions, up from 88.4 per cent in 2022. Total daily FX turnover reached $9.6 trillion, of which inter-dealer trading and other financial institutions account for around ninety-six per cent. Non-financial customers, the category encompassing all corporate trade settlement, including oil and gas, represent just five per cent of that volume.22

Why oil invoicing isn't the whole story: Total dollar-denominated energy trade is roughly $2 trillion per year. The FX market turns over $9.6 trillion per day. A single day of financial-institution FX trading dwarfs the entire annual value of dollar-denominated energy trade. Shifting oil settlement to euros or yuan does not, on its own, dislodge the dollar. The financial plumbing of cross-border lending, debt denomination, derivatives, and portfolio flows runs far deeper than the commodity market.

No alternative currency is ready to replace the dollar. The yuan remains constrained by capital controls and limited investor confidence. The euro still lacks fully unified fiscal backing, although jointly issued EU debt has reached roughly $700–800 billion. Even the crypto ecosystem reinforces dollar dominance, with the vast majority of stablecoin market capitalisation dollar-linked. No credible alternative is expected to replace it.23

But the argument was never about replacement. It is about the erosion of privilege: the gradual weakening of the advantages the dollar confers, above all the ability to borrow cheaply. Goldman Sachs describes this as a marginal shift in new capital flows away from the US and toward other regions, applying steady rather than sudden pressure on the dollar.23 On a $39 trillion debt stock, where net interest already exceeds defence spending and deficits are projected to approach $2 trillion annually, such steady pressure compounds.

What A Weaker US Financial Position Means For Everyone Else

If US borrowing costs rise, the fiscal arithmetic enters a self-reinforcing spiral: higher yields produce higher interest expense, which widens the deficit, which requires more Treasury issuance, which puts further upward pressure on yields.

The feedback loop: Each basis-point increase in the weighted average cost of US debt adds approximately $3.9 billion per year in interest expense across a $39 trillion outstanding stock. That additional expense widens the deficit, requiring more borrowing, which adds to the supply of Treasuries that must be absorbed at auction: putting further upward pressure on yields.

The consequences extend well beyond the US. For the UK and the EU, a fiscally strained America is simultaneously a less reliable security partner and a less stable anchor for global financial markets. The Bank of England and the ECB are already constrained by a US-initiated energy shock, forced to choose between supporting domestic growth and containing imported inflation. If US fiscal fragility compounds that with broader financial-market volatility, European central banks will face the same bind repeatedly: paying the economic costs of decisions made in Washington over which they have no influence.

The broader pattern matters. The Iran war is not an isolated shock. It is the latest in a sequence that includes tariff chaos, Greenland threats, the Venezuelan abduction, the weaponisation of sanctions, and now a blockade declaration walked back within hours. Taken together, these episodes are reshaping how governments assess the risk of dependence on American-led systems. Each one individually might be absorbed. Collectively, they form a signal: that the US under its current leadership treats the institutions of global economic cooperation as instruments of leverage rather than shared infrastructure.

The bottom line

Consider the arc. In 1974, Kissinger built the petrodollar system on a clear mutual interest: security for oil, dollars for Treasuries. In 2003, the invasion of Iraq tested that understanding. By 2026, the US is no longer failing to protect its Gulf partners from an external threat. It is the author of the conflict that has destroyed their infrastructure. The historical parallel is sterling's loss of reserve-currency status between the 1920s and 1960s: not a single collapse but a series of steps, often triggered by crises, of which Suez in 1956 was the most famous. A failed military adventure exposed the gap between imperial ambition and fiscal reality.

In the short run, the war has actually reinforced the dollar's dominance. The greenback has risen roughly two per cent against a basket of major peers since the conflict began, as investors flee to the one asset class deep and liquid enough to absorb flight capital at scale. Gold, bonds, and equities have all fallen; the dollar has not. That is not a contradiction of the argument above. It is the point. The dollar benefits from crises precisely because there is no ready alternative, and because the US economy is relatively insulated from imported energy-price inflation compared to Europe or Japan. In the near term, the very disruption the war has caused drives capital toward the currency of the country that caused it.

But the structural trajectory runs in the opposite direction. The foreign share of Treasury holdings has been declining for fifteen years. Interest expense has overtaken the defence budget. The CBO projects deficits that will keep the debt stock growing faster than the economy. These trends were in motion before the first missile was fired, and the war has accelerated them by damaging precisely the relationships on which America's borrowing privilege quietly depends: with Gulf energy exporters, with European allies, and with the network of institutions that smooth dollar demand. Currency strategists polled by Reuters expect the war-driven dollar rally to fade as these structural headwinds reassert themselves.

The dollar will not follow sterling's exact path. Its advantages are far greater: no alternative currency is close to ready, the depth and liquidity of US capital markets remain unmatched, and the sheer inertia of dollar-denominated contracts and institutions creates a stickiness that sterling never had. Previous crises, including the Iraq war and the 2008 financial crisis, dented confidence without breaking the system. If the Iran war ends and is followed by a sustained period of predictable US policy, some of the trust being spent now could, in time, be partially rebuilt.

The war may yet achieve its stated military objectives. But its lasting legacy may be measured not in enrichment centrifuges destroyed but in basis points: the slow, structural repricing of American debt as the world diversifies, not because an alternative to the dollar is ready, but because the cost of depending on it has become harder to ignore.

Footnotes

  1. Donald Trump, Truth Social post (opens in a new tab), 12 April 2026. ↩

  2. US Central Command, press release (opens in a new tab), 12 April 2026. ↩

  3. Time, "Strait of Hormuz: Iran Peace Talks Collapse" (opens in a new tab), 11 April 2026. ↩

  4. Dr Sultan Al Jaber, post on X (opens in a new tab), 12 April 2026. ↩

  5. International Energy Agency, "The Middle East and Global Energy Markets" (opens in a new tab), 2026. ↩

  6. Financial Times,"Brexiters turn their backs on Donald Trump after Iran chaos" (opens in a new tab), 12 April 2026. ↩

  7. Bank of England, Monetary Policy Summary and Minutes (opens in a new tab), 19 March 2026. ↩

  8. ITV News, "Starmer: I'm Fed Up Seeing Bills Go Up Because of Putin or Trump" (opens in a new tab), 9 April 2026. ↩

  9. Bruegel, "How Will the Iran Conflict Hit European Energy Markets?" (opens in a new tab), 2 March 2026. ↩

  10. Financial Times, "The damage wrought to the Middle East’s oil and gas supplies" (opens in a new tab), 11 April 2026. Saudi production figures from the same report. ↩ ↩2

  11. Reuters, "Qatar's Energy Boss Says He Had Warned of Dangers of Provoking Iran" (opens in a new tab), 20 March 2026. ↩

  12. Quincy Institute, "Are Qatar and Saudi Arabia Reassessing Their Reliance on the US?" (opens in a new tab), 26 February 2026. ↩

  13. Bloomberg, "The Untold Story Behind Saudi Arabia's 41-Year US Debt Secret" (opens in a new tab), 30 May 2016. ↩

  14. RAND Corporation, Long Shadow of the Iraq War (opens in a new tab), 22 February 2010. ↩

  15. Carnegie Endowment for International Peace, "Arab Gulf–US Diplomacy and the Iran War" (opens in a new tab), 1 April 2026. ↩

  16. Bipartisan Policy Center, "Foreign Investors Hold a Shrinking Share of U.S. Debt" (opens in a new tab), 4 June 2025; Congressional Research Service, "Foreign Holdings of Federal Debt" (opens in a new tab), 23 May 2025; US Treasury Department, TIC Major Foreign Holders data. China peak of $1,316.7bn in November 2013 per CEIC (opens in a new tab). ↩

  17. Moody's Ratings, "Moody's Downgrades United States of America's Ratings to Aa1 from Aaa" (opens in a new tab), 16 May 2025. Moody's was the last of the three major agencies to downgrade from its top rating, following S&P (2011) and Fitch (2023). ↩

  18. Federal Reserve Board, "The International Role of the U.S. Dollar — 2025 Edition" (opens in a new tab), 18 July 2025. ↩

  19. Peter G. Peterson Foundation, "Interest Costs on the National Debt" (opens in a new tab), citing CBO Budget and Economic Outlook 2026–2036 and US Treasury Monthly Statement, September 2025. Defence spending figure from American Action Forum, "Sizing Up Interest Payments on the National Debt" (opens in a new tab), November 2025. Underlying data from US Treasury, "Interest Expense on the Debt Outstanding" (opens in a new tab). ↩

  20. US Government Accountability Office, "Federal Debt Management: Treasury Is Meeting Borrowing Needs but the Deteriorating Fiscal Outlook Poses Risks" (opens in a new tab), GAO-26-107529, 31 March 2026. ↩

  21. US Treasury, TreasuryDirect — About Auctions (opens in a new tab). In 2025, the Treasury held 444 public auctions and issued approximately $29.7 trillion in marketable securities. ↩

  22. Bank for International Settlements, 2025 Triennial Central Bank Survey — Foreign Exchange Turnover (opens in a new tab), 2025. ↩

  23. Federal Reserve Board, "The International Role of the U.S. Dollar — 2025 Edition" (opens in a new tab), 18 July 2025 (EU debt, stablecoin, and yuan figures); Goldman Sachs Asset Management, "The Dollar's Shifting Landscape: From Dominance to Diversification" (opens in a new tab), 25 June 2025. ↩ ↩2